The General Anti-Abuse Rule (GAAR) is a UK tax rule, introduced by the Finance Act 2013, that lets HMRC counteract abusive tax arrangements even where they technically comply with the letter of the law. It applies a “double reasonableness” test: an arrangement is caught if it cannot reasonably be regarded as a reasonable course of action in relation to the tax rules. Where the GAAR applies, HMRC can strip out the tax advantage and charge a penalty of up to 60% of the counteracted tax.
The GAAR targets the most contrived end of tax planning, the arrangements that follow the words of the legislation while defeating its clear purpose. It is deliberately a backstop, aimed at abuse rather than ordinary, sensible tax planning.
What does the GAAR apply to?
It applies to tax arrangements where obtaining a tax advantage is the main purpose, or one of the main purposes, and where the arrangement is abusive. Most of the major taxes are within scope, including income tax, corporation tax, capital gains tax, inheritance tax, stamp duty land tax and National Insurance.
What is the double reasonableness test?
The test asks whether entering into the arrangement can reasonably be regarded as a reasonable course of action, having regard to the tax provisions concerned. The wording is deliberately high: it is not enough that HMRC thinks the planning unreasonable; the arrangement is only abusive if it cannot reasonably be regarded as reasonable. HMRC carries the burden of showing that.
What is the GAAR Advisory Panel?
Before HMRC can finally counteract an arrangement under the GAAR, it must refer the case to the independent GAAR Advisory Panel, which gives an opinion on whether the arrangement was a reasonable course of action. A court or tribunal must take the panel’s approved opinions into account, which gives them real weight in any later dispute.
Is there a GAAR penalty?
Yes. For arrangements entered into on or after 15 September 2016, a GAAR-specific penalty of up to 60% of the counteracted tax can apply, in addition to the ordinary penalties for an inaccurate return. That makes falling within the GAAR an expensive outcome as well as an unsuccessful one.
Where fee protection fits
A GAAR challenge is complex and high-stakes, and defending or settling one means specialist professional input, with the accountant working alongside a tax investigations specialist. Tax investigation insurance covers those professional fees. If your practice wants to protect its clients, see our accountants’ scheme, or read about accelerated payment and follower notices.